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The Financial Services Authority has set out guidance for hedge fund managers on controls against market abuse after visits to some managers uncovered complacency towards risks.

In its Marketwatch newsletter, published today, the FSA said: "We had expected the level of market abuse controls in place would vary, which was indeed the case. Some hedge fund managers had a high level of awareness and appropriate controls in place, others were less aware, had fewer controls and demonstrated a complacent attitude to the risks. We are disappointed by some of what we saw."

The report follows a review the FSA published in July that found market participants generally were not maintaining adequate controls, with some staff unaware that insider trading was a criminal offence. Nine out of 10 bankers and investors in the European high-yield market told Financial News last year they were worried the misuse of private information was fuelling improper trading and market abuse.

The US Securities and Exchange Commission last month issued hedge fund managers a new questionnaire as part of its own efforts to crack down on insider trading.

The FSA said in the latest edition of Marketwatch that some of the hedge fund managers it had visited, as part of its regular supervisory activity, had indicated that, sometimes, companies inadvertently gave them inside information during one-to-one meetings.

The regulator said: "Companies should not be providing such information. However, it could help if hedge fund managers made it clear before such meetings that they do not wish to receive inside information.

"At least one hedge fund manager ensures that investment managers visiting companies are accompanied by a representative from the compliance department. We recognise this is not a practical solution for all managers. Nevertheless, managers should all be able to demonstrate their procedures to manage this risk including, if such information is received, making the necessary arrangements to ensure that it does not trade on such information."

More generally, the FSA said it was following up with the firms visited and launching a programme of visits to a wider cross section of managers to formally assess their market abuse systems and controls.

It outlined the sorts of measures it wants managers to take. These include having senior management take ultimate responsibility for compliance with the FSA's market abuse regime; establishing a restricted list of securities where trading may not be appropriate, and setting up systems to indicate when such a trade has been instigated; and reviewing reasons for trading securities which are being traded for the first time or which are traded before an unscheduled regulatory announcement.

The FSA said regular and appropriate training on market abuse was essential: "We were particularly disappointed at the level and standard of training at some of the hedge fund managers visited. While there are pockets of high-quality training, we found that sometimes the level of training was nonexistent, low and/or of poor quality."